Interest costs on late refunds (Kenol & Total borrow at least 11% while they receive 0% on the late refunds)

Higher transport costs to Nairobi & Western Kenya - using lorries - since KPC spent KES 1 Billion building a HQ instead of upgrading the pipeline! The cost-benefit from an upgraded pipeline far outweighs savings on rent!

Demurrage costs as KPC favours certain players when the ullage (storage) is allocated

Pathetic roads means transporters charge "extra" which is then reflected in the price

The petrol stations sell petrol at break-even prices while using their convenience stores, garages & restaurants as the profit centers

Licenses, municipal taxes & administrative costs

Forced imports through OTS i.e. all importers have to buy from the same vendor

NEMA certification

Basically, the cost of petrol delivered to the customer costs 35/- per litre (or lower) based on $60 per barrel.

The "gross profit" is KES 3-8 per litre. From this the oil marketers have to pay salaries, rent, maintenance, utilities, etc from that slim profit margin. Safaricom's gross margins are a hefty 50%! Why? Its a duopoly that government turns a blind eye to!

The additional 45/- is skimmed off by the government through taxes, no payments of interest on late refunds, KPRL & KPC's inefficiency. The law does not allow Oil Marketers to sue for timely payment of refunds!

Business is about risk and vision. Credit goes to KQ's SMART & TRUSTWORTHY MANAGEMENT TEAM... They have not let me down, yet...

KQ has a measured expansion plan that allows them to be either #1 or 2 (remember GE's credo) on most routes they fly... Bilateral agreements make this the only choice (monopolistic or duopolistic) in some cases but let's look deeper....

Kenya-Europe -> KLM & KQ dominate the Nairobi-Europe routes. KQ essentially runs the AMS-NBO route for KLM. Intense competition from BA & charter flights. Expect steady growth especially after the new Paris flights open up new tourist markets as well as another European gateway to N.America. Note that KQ uses its regional heft to ferry South & Central African passengers to Europe via JKIA.

Kenya-MidEast -> In spite of strong competition from Qatar & Etihad... KQ & Emirates dominate the Kenya-Middle East routes. That said, the competition on these routes is intense. Definitely a challenging market but necessary since lots of traders like visiting Dubai.

Kenya-S.Africa -> KQ dominates the business sector. KQ has 2 daily flights vs 1 for SAA. There is no other airline that comes close to SAA or KQ. The growth is limited but KQ can attract (wealthier) S.African passengers to use JKIA as hub to China, Dubai and India.

Kenya-Southern Africa -> KQ is dominant in most countries it flies to from Kenya. KQ crushed Air Tanzania while Air Zimbabwe is almost dead. The other airlines are small and inconsequential, as yet, to KQ.

Kenya-Central & West Africa -> Slow but surely... expanding. The goal is to connect to China and India using Nairobi was a hub thus the push to enlarge and modernise JKIA. This market is huge esp considering China's push into Africa e.g. Sudan and Zambia.

Kenya-China -> KQ will face competition in due course but for now they are the only airline that serves China direct from Nairobi. Plus 3 destinations... Hong Kong, Guangzhou & Shanghai. This is the new market for KQ. There is potential for BUSINESS and TOURISM. Chinese tourists are among the highest spenders. Hong Kong's per capita is at OECD levels.

There are challenges for KQ. I will try and be KQ specific where possible.

Oil PricesThe bane of airlines for many years. KQ will do OK as long as it doesn't rise beyond $80. KQ is in a much HEALTHIER position than most African competitors including SAA and Ethiopian. A privatised SAA could become a formidable competitor but most African countries can't afford to start their own airlines thus there is a larger untapped market as African economies grow.

TerrorismThere is little one can do when idiots want to kill others. Definitely a threat but you have to learn to live with it. After 9/11, New Yorkers (more than ever) live in high-rises. Did the hijackings of 1970s & 1980s kill off air travel? No, coz the easiest way to travel long distances remains air travel.

TourismImportant to KQ but less profitable than Business tourism. I think most African travellers are business travellers thus less sensitive on price. The expansion to the Far East to reduce reliance on UK market for tourists while Paris will open new markets.Kenya can maintain the tourism momentum by improving security & roads. Improved roads and security will boost the market for tourism thus creating a further need for KQ's expansion.

CompetitionIt is good. It is needed and it has forced KQ to be leaner & meaner. All African airlines have a deadline to be E-ticket compliant by 31 Dec 2007. Fewer than 10 airlines have done so by 31 June 2006 & among these are KQ, ET and SA. More airlines will become compliant b 2007 but many will not especially the struggling airlines. This will allow KQ, SA & ET to expand into these markets for international passengers.

KQ's "real" growth can only come from international routes since the local market is "small" in comparison. There are a limited number of Kenyans who can afford the Nbi to Msa/Ksm flights. As the roads and railway get rehabilitated, the local market for KQ will reduce or stagnate on these internal routes. Kenya is a small country and Tanzania has a larger number of towns served by Precision Air than KQ does!

PandemicsThere is little any one airline can do but ALL international airlines will be affected.For Kenya's part, it needs to ensure that humane rearing methods are used.I recommend becoming vegetarians... less hassles with Avian Flu, Mad Cow or a host of other emerging diseases!

It seems the pandemics start in Asian countries which means more European tourists will perfer Kenya/Africa as a destination.

LabourYes, that is a problem.Sometimes, it is NOT the employees but the vision that drives firms. When things are tough, employees cry about "working conditions" and "low wages" but when things are good they want to share in the pie... QUIT, if you think you are underpaid!

Anyway, whatever the merits of my views, I think KQ should sacrifice short-term gains to crush the unions. Unions generally want to reward "seniority" not productivity. KQ has started traning new staff who will probably supplement the current staff.

Brain drain IS a problem for KQ esp from the Middle Eastern airlines. Nevertheless, I hope Kenya produces more airline staff who can be "exported" since that brings in more forex!

KQ has embarked on recruiting staff fluent in Mandarin, Thai, French and Hindi as those markets become more important.

Mandarin - China (3 cities and counting).Thai - Thailand is becoming a "hub" for KQ for the Far East e.g. KoreaFrench - The new Paris route with associated expansion to destinations like Mayotte, Brazzaville & Comoros.Hindi - Daily flights to Mumbai with Delhi, as a destination, in 2007.

So without worrying about the "share price"... KQ is slowly becoming an engine for some of Kenya's economic gains. I expect the growth to continue with stumbles along the way. One important thing is I TRUST the Management.

Please comment... I do want to know if I am on the wrong track... or have missed an important part of the puzzle.

KQ did not disappoint though the torrid profit growth over the past 3 years has slowed down during 1H 2006-7.

The total passengers carried were up 7% to approx 1.3 Million thus setting the stage for another record for 2006-7.KQ owns 49% of Precision Air, which has now become the largest Tanzanian airline as well as regional powerhouse for the Tanzanian market.

Direct Expenditure 19,803 +15.4%Overheads 4,572 +11.6%Total Expenses -Fuel 7,648 +26.3% (The largest cost increase but only 15% attributable to the increase in the cost of fuel thanks to hedging)Other 16,727 +10.0%

So what do I think?A commendable performance considering the extremely high fuel prices experienced during the past 6 months. There will be some relief in 2H since fuel prices have dropped since Oct 2006. KQ benefits from the price drop only to the extent of the unhedged portion.

KQ has hedged its fuel thru April 2007 - probably at higher prices than the current $60 per barrel but has already reduced the fuel surcharge on their tickets. This may neutralise any benefit KQ has from the decrease in fuel costs.

There is still a 20% unhedged benefit that will flow through in the next 6 months.

KQ will replace its 2 SAAB aircraft with new regional jets which increase carrying capacity, range, are faster & have lower costs per km. Of course, they will raise the current debt levels

New 777 will be delivered in Feb 2007 for a larger network as well as lower costs per km. Full benefits will flow through in 2007-8.

The old 737-200s will be replaced by 3 new 737-800s in 2H 2006-7. Full benefits will flow through in 2007-8 since the capacity is higher.

In spite of the current challenges esp new entrants, I expect KQ to do better in 2H 2006-7 since they will have newer - more efficient - aircraft with a network that is continously being expanded thus reducing costs across the board. New agreements in East Asia will allow for better connections. The Paris sector allows for increased N. American connections (in addition to LHR & AMS) while tapping into a new tourist market.

Over all I expect lower fuel prices will boost KQ's bottomline as it has been subsidising some seats in Economy class on many sectors. Furthermore, KQ will be able to sell more tickets to price-concious travellers. They will have a new 737-800 in time for the Xmas rush

I expect that the general price reduction of air travel, lower fuel costs, winter in the Northern hemisphere and better economic growth in Africa will be the key to KQ's having a better 2H 2006-7.

Splits are all the rage but the way I see it the PRIMARY beneficiaries are your "friends" the stockbrokers...

Why?

Unlike a Rights Issues, there is capital "raised" by the Listed Firm

The trading increases thus raising listing costs for the Listed Firm

The costs of maintaining share registers increases

The extra trading benefits the brokers who trade in & out for the shareholders!

There is a valid point that some investors may not be able to buy the higher-priced shares but they are in a minority.

Mr. Warren Buffett has never "split" the shares of his Investment Firm, Berkshire Hathaway, since he feels it only creates an opportunity for fast money types. This is the 2nd richest man in the world & he "earned" his money unlike some sheiks & crooks.

When Buffett’s Berkshire Hathaway (nyse: BRKA - news - people ) stock reached $1,300 in 1983, Buffett addressed and rebuffed the prospects for a stock split. “We want [shareholders] who think of themselves as business owners and invest in companies with the intention of staying a long time. And, we want those who keep their eyes focused on business results, not market prices,” he wrote in a letter to shareholders that year. Source: Forbes

Note that the current price is over $104,000 per share! Yes, that is over KES 7.25 Million per share!

If Berkshire Hathaway was in Kenya, the shareholders might riot in the streets!

Back to Kenya...

Barclays - They have never split their shares in Kenya but there is a chance they may do so. The majority shareholder does not trade their shares i.e. the share price is less of a concern than the profitability of BBK.BAT - Unlikely at the moment. They prefer paying "good" dividends. The majority shareholder does not trade their shares i.e. the share price is less of a concern than the profitability of BAT.

E.A.Cables - The majority shareholder (Trans-Century) is an outfit that would probably take profits to re-invest in other businesses OR leverage their EAC holdings. Note that the price of EAC has fallen gradually (I told you so) to more reasonable levels. EA Cables has a bright future but the price reflects that future and more!

ICDCIC - The majority shareholder (Chris Kirubi) is a smart investor who IMHO probably take profits to re-invest in other businesses OR leverage his ICDCIC holdings. Note that the price of ICDCIC has fallen and IMHO will continue to fall to reflect the "truer" value. ICDCIC has a bright future but the price reflects that future and more!

This information was from the Excel File the NSE had on their website for Price & Trades downloads.

Since when was an AVERAGE lower than the minimum value in the data range?

As noted by dudej;I do not need a Bsc in Maths to show that the if high is 94 and low is 94,the average statistic of 84 is misplaced. Even the lowest weighted average for would have to be 85. Perhaps someone accidentally replaced 94 with 84 on the average price.

It is pathetic to note such errors! What other errors are "hidden" from us?

There was another mega-goof in the past month when the price list had Olympia at 3/-.... Someone could have placed a BUY order at market expecting the maximum 10% to kick in but instead buys at 5x the price coz of a IDIOTIC error!

As dudj asked "Aren't these costly mistakes? and who is paying for them?"

If Kenya had had leaders, the ethnic problems would not arise. Its the CORRUPT that render Nations apart.

Cosomopolitan leaders like;Tom Mboya (who was a Nairobi MP thus supported by more than just Luos)Joseph Murumbi (who quit after seeing how kenyatta & his cronies were out to screw Kenya)Pio Gama Pinto (the first high-profile politician to be murdered)JM Kariuki (who was the only prminent Kikuyu politician to go for Mboya's funeral)

were all killed or sidelined...

I hope we choose someone who is a LEADER not of the same mold as the presidents of the past!

Monday, October 23, 2006

Eveready does not seem to be a "growth" company but it might have its oft-mentioned IPO soon!We will have to wait for the prospectus but the shareholders in Sameer Africa (formerly Firestone EA) who bought into the IPO almost 10 years ago have little to show!

Will this be any different?The IPO price was 35.50 & the current price is 16/- thus a DROP of 50% over 10 years!

Family Finance is preparing for a Private Placement but will favor its Account holders (does that include loanees?), Board Members & Staff...

It seems the competition for funds will be intense since the following IPOs/Rights Issues/Private Placements/Offers for Sale are supposed to take place by June 2007:

Safaricom {IPO/OfS} for Sale by Mar 2007 (mwasjd tells me it will be delayed thru 2008)

At some point, there will too many IPOs chasing too few funds esp if the mega-IPO of Safaricom sucks up the cash! The cash will recirculate into the economy but the funds will be concentrated in fewer hands.

The AGM is on 12 Jan 2007 (which is quite late considering the year end was June 30 2006) & the split shares start trading on 22 Jan 2007.

Price on 1 Jan 2006 was 72.50 thus the price has increased by 450%, while profits 106% & NAV only 23%.... The "real" NAV is probably higher since they have some great investments whose value does not fully "show" up on the Balance Sheet.

Bottomline:The NAV is probably higher than shown since some assets are shown at "cost" or "directors' valuation" that could be conservative. Included among these unlisted investments are shares in Eveready & General Motors (K) among many others.

ICDCIC did not provide a breakdown of the income from sales of shares. These gains may be one-time gains if ICDCIC cannot replace the "sold" shares with other investments that will attract similar gains/returns in future years.

ICDCIC has indicated a Rights Issue was possible to raise funds. The split will "reduce" the price to "manageable" levels for many investors.

Since it remains an investment firm, the premium to the NAV is (IMHO) too high unless the unlisted firms' are valued at much higher prices/multiples.Nevertheless, I expect the price to rise on a SPECULATIVE basis.

IMHO there is little value/upside at current prices even though the firm is expected to do well in 2006-7.

Monday, October 16, 2006

OCHL has been one of the "quietest" counters on the NSE but it has zoomed ahead after the announcement of an acquisition... Now it has become a "hot" stock as the trade volumes have significantly increased.

OCHL has been trading in the KES 14-17 range from 1 Jan 2006 through 8 Oct 2006. The current price rise started on 9 Oct 2006 (16/-) to the current 25/- (16 Oct 2006). The current high is 26/- which beat the 2005 high of 25/-.

1H 2006 Results for OCHL were released on 28 July 2006. They are available as a free download courtesy of Investing In Africa.

The Kenyan operation performed much better while OCCC (B) posted higher revenues but a lower profit during 1H 2006 vs 1H 2005.

OCC(B) has issued a cationary on the SA acquisition earlier in the year as well as mention it on the 1H 2006 Results' commentary.

OCHL is planning a Rights Issue to fund its portion of the SA acquisition -through a OCC(B) Rights- as well as upgrading its Kenyan manufacturing plant.

S.Africa will host the 2010 FIFA World Cup thus the construction sector is likely to see a boom as roads, buildings, stadiums & other infrastructure is refurbished or newly built.

Fun StuffBTW... on Page 18 of Nation's Smart Company (17 Oct 2006), the "Pick of the Week" claims OCHL has a Namibian subsidiary... Hmmm... just coz Namibia borders Botswana does NOT make Botswana part of Naimibia! Is Kenya in Uganda?

Some Kenyans complain that Americans think "Africa" is one country... well some Kenyans think Botswana is in Namibia!

Friday, October 13, 2006

A campaign to rally public support for the proposed East African Federation was yesterday launched in the three countries. President Kibaki set the ball rolling in Nairobi, as Uganda's Yoweri Museveni and Tanzania's Jakaya Kikwete did the same in Kampala and Dar es Salaam, respectively.

The campaign to popularise the plan for political and economic union is scheduled to take six months. The initiative seeks to explain the benefits of the federation to the region's 105 million people, leading to a referendum to be conducted in each of the three countries.

Why bother with a political union between countried when Kenya & Uganda have massive internal political problems including:

Lack of true National parties as opposed to tribal gatherings (Kenya)

A faulty constitution which needs replacement (Kenya)

A constitution that is changed at a whim to let the president "extend" the term of office (Uganda)

Tribal clashes even in this day & age (North Eastern Kenya)

If approved at the referendum, then East Africa will become a federation in 2013. The significance of the federation is that the region will have a common president, flag, anthem and currency. The presidency will rotate among the three presidents.

Why should we spend BILLIONS on a referendum that will,IMHO, fail. The EU/EC are still navigating the ECONOMIC federation/union before taking steps to a launch political federation. Furthermore, they have not been able to successfully navigate those waters even after trying for more than 15 years, let alone the 2013 target (only 7 years away)... This is a process & it can't be rushed. These funds need to be spent on improving the infrastructure connecting the various countries. I think a new rail system, better ports & open skies will do more for "natural" integration than a referendum!

The federation president will be a symbolic figure, as each country will retain her president, national flag, national anthem plus its own economy within the union. The federation will have an enlarged Parliament and will allow free movement of people and easy trade among the members.

Apart from the economic factors like free movement of goods & people, there is no benefit but ANOTHER parasitic parliament that will remain toothless.

What is the point of a symbolic president?Why spend more money on a parliament that will have few powers?

I see more wastefulness as witnessed by the GREEDY MPs in Kenya!

Tanzania has been belligerent towards Kenyan firms, drivers, traders & media. Why would they suddenly give up political control when they can't even loosen the economic chokehold?

Members of the East African Legislative Assembly will be elected directly by the people unlike today, when they are appointed by political parties and approved by respective parliaments.

Please don't waste my time & money! What issues will these MPs run on? Will they have a CDF as well? What more will they want for benefits?

President Kibaki unveils the East African Community flag at the KICC yesterday. Photo by Anthony Kamau

Yesterday, President Kibaki said: "We have committed ourselves to shaping a new future; a future in which East Africans will live together, united in peace and prosperity. "The process we are launching today aims at revitalising the spirit of East African unity in the minds and hearts of our people. We want to shift the discussions on the East African Federation away from conference halls to the urban streets and rural villages of East Africa."

He can't even get this country behind him! Shelve the political federation & work on getting Tanzania back into the EAC & COMESA rather than SADDC. In the meantime, they should open the borders to Kenyan trade.

President Kibaki said even as the national consultative process was rolling out, Kenyans should remember that a political federation "was a complex matter as it involved important issues of sovereignty which the people must decide on." He said during the launch at the Kenyatta International Conference Centre, Nairobi: "It is, therefore, important that the subject of political federation is adequately discussed and appreciated by all the people of East Africa. Thus, we should not forget that the sovereignty of our individual states is derived from the will and self-determination of our people."

This is too complex to handle before we are economically ready. Behemoths like W.Germany had a difficult time with integration. The "stronger" W. Germany was weakened substantially by the cost of the reunification. Kenya has the strongest economy of the 3 but remain minnows in comparison to mnay European & Asian countries.

Bottomline:

This is a waste of Taxpayers' money. I think kibz will use this referendum as a means to campaign for himself & his cronies. They will tour the country pushing the referendum but actually raise their profile for the elections!

It is far better to negotiate for favourable trade terms with other countries while following a reciprocal policy of opening our borders completely to economic activities.

Thursday, October 05, 2006

I propose that there should be 1 (ONE) presidential term for 7 years. This means the Prez know there is no second chance for a "legacy". It will also eliminate dilly-dallying by a Prez in Year # 5 trying to get re-elected.

Savings & productivity will accrue as there is only 1 campaign "season" every 7 years. The Prez can continue with running the government (Year 7) while the candidates run around like headless chickens.

We adopt a ZERO party system thus making ALL candidates independent while eliminating the need for party loyalty.

President: Anyang Nyongo- KE said: He reminds me of Manmohan Singh. He's a smart, well educated techocrat who could really fix Kenya. He just needs to get out of Raila's shadow.- I met him about 6 years ago at a function where he was one of the keynote speakers & he came across as not only smart but very articulate.

"Prime" Minister or Head of the Civil Service or some powerful post: Titus Naikuni- He is efficient, smart & a no-BS guy. I was impressed by his performance at KQ. He even told off moi when moi fired Naikuni! Guts!

Minister of Finance: Mohamed Adan- KE said: The current MD of Barclays bank. This guy pulled himself up from the bootstraps of mandera, to the harvard business school to barclays.- I have met him. He is very smart! See the post on the Barclays 2005 AGM (held in Apr/May 2006) on Bankelele. I agree with KE on this choice.

Minister of Justice: John Githongo or Prof. Yash Pal Ghai- KE said of JG: You want to eliminate corruption? he's your guy.- My take is to have a (smart & clean) lawyer not sullied by politics thus I propose Prof. Yash Pal Ghai. Perhaps he can get us a better constitution that does not allow for crooks to run for protection under the "constitution".- JG certainly needs a position in government but not a political role. He needs to be the head of KACC or a ministry whose role is to "audit" the other ministries.

Attorney General: Maina Kiai or Pheroze Nowrojee- MK is a Human Rights & Anti-corruption crusader who made life hot for moi. Definitely an excruciating thorn for kibaki & cronies associates!- PN is someone who has stood up to the government on numerous occassions esp when defending the "undesirables" in court. Well known among the Human Rights circle.

Minister of Telecommunications: Ayisi Makatiani or Sammy Kirui- KE said of AM: We've got to diversify the economy away from land and into high-tech.- There are good candidates. I like Kirui (current Telkom MD) since he is intimate with the industry. He has been responsible for the refreshing direction Telkom has taken of late.

Minister of roads, public works: Mukhisa Kituyi or Manu Chandaria- KE said of MK: He'a a hard worker and he understands that trade cannot take place without the proper infrastructure.- I don't think kituyi cuts it any longer! Uchumi failed under his watch when ICDC warned him of the "impending" doom! His threats to Nakumatt - when Nakumatt (cheekily) asked for a "subsidy" similar to what the government offered Uchumi - was unprofessional. He does not have real brass-knuckle experience in the business world. I think we need someone from the private sector e.g. Manu Chandaria. He is very knowledgable about business in Kenya, trading with the world & dealing with MNCs. His firms are among the largest in E.Africa & has investments in UK, Nigeria, S.Africa, India & Australia!

Lands & Housing: ????

Foreign Affairs: ????

I like the recent trend in the US where Governors (not senators/congressmen) are elected as Presidents since they have more experience running a "government".

GW Bush- TexasBill Clinton - Arkansas

If Kenya had "real" governments at the provincial level, it might provide us better choices. I am not supporting divisive majimboism but I admire the (imperfect but working) US system.

Disclosure: I used Kenyan Entrepreneur's comments as a foundation for this blog entry. I don't know how to link to her comments. Thanks!

Current PM of India & former Finance (technocrat) Minister. The reforms launched in the 1990s have propeled India's economy into the top 20. Poverty still remains an issue but the progress made is phenomenal.

Well respected & liked. Almost a saint! For all the criticism, Mandela voluntarily left the S.African presidency after one term - which begs the question; was he a real African president? - which has endeared him to many around the world. It is this selflessness that gives him diplomatic heft.

Naikuni - Did a great job as PS until moi fired him over the radio. Naikuni responded with something on the lines of "Thanks to whoever fired me"... Hah, chutzpah! Prior to joining the government as PS, he was MD of Magadi Soda & currently CEO of KQ. KQ's profitability has grown exponentially during Naikuni's leadership.

UPS - "Big Brown" is one of the world's largest logistics & transportation firm & has its own fleet of aircraft (235+ aircraft; compare KQ at 22), semi-trucks, storefronts & freight cars!

Has done wonders for Nairobi even with idiotic politicians trying to override him!

A despotic guy but RESULTS...

Transperancy & Accountability (unwieldy name for the portfolio. Suggestions?): John Githongo

Former PS without political experience - a huge PLUS- thus trusted by Kenyans. He was the CEO of Transperancy International until he was made PS. Living in exile since he fears - rightly so - for his life were he to return to Kenya while michuki, karua & kibz are in power.